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Reserve Bank: OCR unchanged at 7.25 percent

26 October 2006

OCR unchanged at 7.25 percent

The Official Cash Rate (OCR) will remain unchanged at 7.25 percent.

Since our September Monetary Policy Statement, there has been a significant improvement to the near-term inflation outlook, mainly as a result of the recent decline in oil prices. We expect lower fuel prices, together with the recent rebound in the exchange rate and Statistics New Zealand's reweighting of the CPI, to give an unusually low December quarter CPI increase. These are temporary factors, however, and, apart from the likely favourable impact on inflation expectations, they are not expected to impact materially on medium-term inflation.

Indicators of medium-term inflation pressures remain significant. Overall GDP growth in the second quarter was consistent with our September projections and the continued rebalancing of demand away from domestic spending towards exports. Continued strength in most of New Zealand's international markets and a return to a downward trending NZ dollar exchange rate should support this rebalancing. On the domestic side, however, the housing market remains resilient, supported by net inward migration and ongoing mortgage credit expansion at low interest margins. Further, we could see a pickup in household consumption in the third quarter as a result of the drop in petrol prices. On balance, inflation pressures appear to be abating gradually. But some indicators of resource pressures, such as high capacity utilisation and a tight labour market, continue to signal caution.

Taking all of this into account, monetary policy pressure will need to be maintained for some time to bring inflation back sustainably within the 1-3 percent target band. In this regard, the policy outlook is little changed from our September statement. The balance of inflation risks remains skewed to the upside. Further monetary policy tightening cannot be ruled out, and any easing of policy remains a considerable way off.

ENDS

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